Force majeure, reasonable endeavours and sanctions: Court of Appeal takes a different view

The dispute in this case concerned the carriage of bauxite from Guinea to Ukraine pursuant to a Contract of Affreightment (the "Contract") between MUR and RTI. Under the terms of the Contract, the amount of freight due was defined by reference to a price per metric tonne in USD and payment was to be made to MUR in the Netherlands.

On 6 April 2018, the US Treasury's Office of Foreign Assets Control applied sanctions to RTI's associated company. That led to prospective delays and difficulties for RTI in paying the freight in USD, as it was required to do under the Contract. As an alternative, RTI proposed that it make payment in EUR which could be converted into USD as soon as it was received by MUR's bank. RTI also agreed to bear any additional costs or exchange rate losses in converting the EUR into USD. MUR rejected RTI's Proposal and sought to invoke the force majeure clause in the Contract.

MUR suggested this relieved it from the obligation to load the vessel for two reasons. First, the sanctions exposed it to potential liability as a secondary party if it continued to deal with RTI. Second, the sanctions would prevent the payment of freight, since almost all such payments would have to pass through an intermediary bank in the US, and would therefore prevent or delay loading as MUR could not be expected to load cargo for which it would not receive payment. RTI denied there was any Force Majeure Event, suggesting there was no real risk that MUR would be exposed to liability under the sanctions, as it was a non-US entity and a transitional period had been provided to wind down relations which covered most of the term of the Contract. RTI had also offered to pay freight in EUR and to bear any costs of converting this to USD. Therefore, RTI submitted this could not be a Force Majeure Event, as MUR could have overcome the impact of sanctions by reasonable endeavours – i.e., accepting a different, but functionally equivalent, form of payment.

This dispute was submitted to an arbitral Tribunal who rendered their First Partial Award on this (and a number of associated disputes) on 23 December 2020 (the "Award"). In the Award, the Tribunal largely accepted MUR's case, finding that each of limbs (a) to (c) in the definition of Force Majeure Event had been satisfied. However, the Tribunal found that MUR could have accepted payment of freight in EUR without suffering any detriment and, therefore, found that the "reasonable endeavours" clause effectively required MUR to accept RTI's Proposal. Therefore, the Tribunal concluded that there was no Force Majeure Event.

MUR appealed the Award, under section 69 of the Arbitration Act 1996 and with leave from Calver J, on the grounds that the Tribunal had erred in law concluding that the "reasonable endeavours" sub-clause (clause 36.3(d)) required MUR to accept a form of non-contractual performance. RTI resisted this appeal and sought to uphold the Award both on the original grounds and on a number of alternative grounds.

High Court decision

At first instance, Jacobs J concluded, among other things, that on a true construction of the Contract, payment was to be made in USD. The mere fact that MUR's agents could convert the payment received to USD prior to remitting this would not render the payment in EUR contractually compliant. RTI's offer to make payment in EUR was an offer to render non-contractual performance. Bulman v Fenwick & Co[1] and Reardon Smith Line Ltd v Ministry of Agriculture, Fisheries & Food[2] provided clear authority that "the nature of the contractual obligation determines the question of the nature of the steps which a party must take to avoid the impact of a force majeure event, and that a party does not have to perform the contract otherwise than in accordance with the contract in order to avoid a force majeure event"[3].

The High Court held that MUR was not, in the exercise of reasonable endeavours, required to accept payment in EUR and that the imposition of sanctions had properly constituted a Force Majeure Event. Therefore, the Award had been vitiated by an error of law.

The Court of Appeal (Males LJ gave the leading judgment) overturned the High Court's decision and restored the Award, concluding that MUR's acceptance of RTI's Proposal would have overcome the state of affairs caused by the difficulty of making timely payments of USD resulting from the sanctions imposed on RTI's associated company.

What was the correct approach to reasonable endeavours and alternative performance?

Males LJ made the following points, among others:

• The appeal related to the specific terms of clause 36, particularly clause 36.3(d). The Court of Appeal was not concerned with reasonable endeavours or force majeure clauses in general. Rather, "[e]ach such clause must be considered on its own terms"[4].
  
  
• Clause 36.3(d) was not concerned "with the exercise of reasonable endeavours in the abstract, let alone with whether the party affected has acted reasonably. The question is whether the relevant event or state of affairs can be overcome by reasonable endeavours from the party affected. However reasonable a party's endeavours may be, they are irrelevant if they do not result in the overcoming of the event or state of affairs in question"[5].
  
  
• MUR had a contractual right to receive payment of freight in USD and there was no question of MUR being required to abandon or vary that right. Rather, the question was whether accepting payment in EUR would overcome the state of affairs resulting from the imposition of sanctions on RTI's associated company.

Why was the High Court wrong?

The High Court's reason for concluding that the force majeure clause did in fact apply was that the Contract required payment in USD and a party is not required, by the exercise of reasonable endeavours, to accept non-contractual performance in order to circumvent the effect of a force majeure or similar clause. However, the Court of Appeal concluded that the purpose of the payment obligation was to provide MUR with the right quantity of USD in its account at the right time, which RTI's Proposal provided.

The Court of Appeal distinguished this case from the cases relied on at first instance, Bulman v Fenwick[6] and Reardon Smith Line Ltd v Ministry of Agriculture, Fisheries & Food[7], noting that neither of those cases had an equivalent clause 36.3(d)(a reasonable endeavours obligation) and the proposed alternative performance would not have overcome the problem nor given the affected party the substance of what it was entitled to under the contract.

This decision will be of particular interest to parties facing difficulties in rendering or receiving payment in contractually specified currencies as a result of sanctions, including those associated with the conflict in Ukraine. Although on this occasion the Court of Appeal found that the offer to pay in a different currency (which would then be converted into the currency stipulated under the Contract by the affected party's bank) could overcome the imposition of sanctions on RTI's associated company, this may not be a fool-proof way to avoid sanctions risk. Nor would this always be desirable: a last-minute currency change could potentially be a circumvention offence in some jurisdictions. What may be somewhat comforting is that the imposition of sanctions on a counterparty was accepted as an "event" capable of triggering a force majeure clause; this question however was accepted by the court and was not the subject of the appeal, so comments in the judgment could well be tested again in the future.